White collar crimes in Sri Lanka

Hans Wagener, Territorial Senior Partner, PricewaterhouseCoopers Germany, recently addressing the Sri Lanka Institute of Directors, stated that “although there was a rude wake up call with Enron and World Com, white collar led corporate scandals can happen again. Almost 50% of companies are victims of fraud, larger the size of the company greater the risk of white collar crime, with two thirds of these offences being detected by chance. The criminality of employees and business partners are increasing”. He described the typical characteristics of white collar criminal” as one aged between 31 and 50 years, socially discreet, does not usually have a criminal record, has been with the company for some years, is educated above average, male (only 7% are females) and works with a probability of 32% in the company’s top management of the company”.

International accounting firm PricewaterhouseCoopers issued its Global Economic Crime Survey 2005 surveying companies worldwide about how they are affected by fraud and other types of white collar crime, and how they go about detecting and combating such misconduct and reported that “since their last survey in 2003 there has been an increase in white collar crime instances by 8%”.

The headline-grabbing Reuters story on it was the assertion that "Over one third of these frauds were discovered by accident, making 'chance' the most common fraud detection tool."

White collar crime Prof Blog asks (a blog’s site) “Can it be that so many frauds are only discovered through luck, or some other random happening instances, so that much of the money spent on internal controls is a waste? It's interesting to note that an ‘accidental’ discovery of fraud includes an internal tip to management or through a corporate hot-line. It is the rare fraud that involves self-revelation, and perpetrators are unlikely to create files labeled ‘Fraudulent Scheme’ or ‘Accounts I've Embezzled.’ Those engaged in fraud know they have to avoid the internal audit department, and it is often the subordinate or co-worker who notices the misconduct first”.

The report notes that internal controls are the second most likely way in which fraud is detected, so it is probably not the case that internal control mechanisms are a waste of money, if they encourage employees to report misconduct and operate to uncover other types of fraud. “An organization's corporate ethos can go a long way toward preventing fraud and other types of economic misconduct in the first place. An environment that stresses ethical conduct and a measure of watchfulness can keep some (perhaps even most) fraud from ever happening, something that simply cannot be measured. , "Luck is the residue of design." So too may be the "chance" discovery of fraud in corporations” sums up Prof Blog.

Are white collar crimes in Sri Lanka typical of the global findings? If the statistics of the number of such crimes are taken it may have similarity to the “by chance discovery” as well as the typical characteristics. If however, the value of detected and undetected white collar crimes are taken together the Sri Lankan statistics will vary significantly in relation to both the level of discovery and reporting as well as the typical characteristic of the criminal. It is even possible that the bigger white collar crimes are never allowed to be detected by the system in Sri Lanka, and are conducted by those persons (key shareholders, directors and top management) in overall management of the entity, with characteristics quite different to that described by Hans Wagener.

This difference is possibly led by Sri Lankan companies being more family owned, led by owner shareholders, the top management positions being held by family members and by ineffective and non independent professional management, with so called “independent directors” being friends, old cronies and old school tie contacts.

The common undetected white collar crimes in Sri Lanka include

• Under and over invoicing
• Non payment of customs and other import tariffs
• Unaccounted for commissions on imports, exports and on acquisition of fixed assets
• Bribery and corruption related payments accounted as legitimate expenses
• Family and personal expenses charged as business expenses
• Loans and advances to related parties on non commercial terms
• Contracts with related parties not at arms length
• Transfer pricing related leakages
• Understating sales, overstating expenses and stock valuations being manipulated
• Diversion of business assets and incurring unrelated to business liabilities
• Investing business funds in ventures not approved by shareholders/Articles
• Directors and top management fees and benefits not being properly accounted
• Misstatements and misinterpretations in prospectuses, account and reports
• Non recovery of loans, advances and sales and associated write offs

With the existing regulatory and governance processes of Public Accounts Committee, COPE, Ethics Committee, SEC, CSE, other Regulators, Audit, Standards Monitoring Boards, Professional bodies, Bribery Commission, Police remaining ineffective to prevent these white collar crimes, do we need yet another truly independent public oversight body, especially an Auditor Oversight Commission, operating in Germany as described by Hans Wagener?